India-Nepal Power Trade Agreement: Challenges before Opportunities

24 Mar, 2015    ·   4854

Kalpana Jha provides a Nepalese perspective on the 2014 India-Nepal Power Trade Agreement

Kalpana Jha
Kalpana Jha
Research Intern
The Power Trade Agreement (PTA) signed between Nepal and India in September 2014 was much touted as the most significant achievement of the 18th SAARC summit. This agreement has been perceived as a major advance in not just addressing the increasing power demand in India and Nepal but also as a major economic boost for Nepal. However, not much analysis has been presented on this subject, perhaps because the implementation is still pending.  Will the PTA result in the remarkable benefits that it is expected to deliver? Or will it result in new disputes between the two countries?

The deal, termed ‘historic’ by both the governments authorises the two neighbours to develop transmission interconnections, grid connectivity, power exchange and trading through governmental, public and private enterprises on mutually acceptable terms. It also allows licensed electricity producers, buyers and traders from both countries to engage in cross-border electricity trading, including via power exchanges, and to seek cross-border transmission access as per the laws of the respective countries. 

This is not the first time Nepal has entered into agreement with India vis-à-vis power trade and water sharing. There are multiple water sharing treaties that have been signed in between between the two from the 1950s to the 1990s; and they too were lauded and considered as path-breaking as the 2014 PTA. However, in the long-run these treaties have proven to become major bones of contention between India and Nepal. For instance, vis-à-vis the Koshi Treaty (1954) and the Mahakali Treaty (1996), there still remains contention regarding two principal issues: water rights, and the question of the management, control and operation of the barrages.

Additionally, information-sharing and co-operation on water issues is also crucial. This was particularly due to high ambition coupled with a lack of vision and cooperation from both ends. Therefore, it is important that the two countries seek to arrive at a common framework of perspectives on this subject. As the first step, joint mechanisms need to be evolved for water management and control. An inclusive approach would forge trust and make both countries accountable.

While these mechanisms are yet to be evolved, Nepal has entered into another ambitious PTA with India. While it appears to be an actionable project on the surface, it contains vague and questionable clauses. For instance, the statement “The agreement enunciates that it will enable cooperation in the power sector, including developing transmission interconnections, grid connectivity, power exchange, and trading through the governmental, public and private enterprises of the two countries on mutually acceptable terms,” stops short of specifying what the ‘mutually acceptable’ terms are, and whether or not they will be a win-win for both sides. Also, the arrangement of separate agreements between the concerned entities on project-to-project basis for investments and related terms and conditions in developing specific cross-border transmission projects for power trade needs meticulous scrutiny. 

Furthermore, the agreement makes no mention of any mechanism to tackle problems of natures similar to those that have plagued previous. Importantly, the onus of effective management and balancing of both the investors and buyers will lie with Nepal. Given the current internal and external political state-of-affairs in Nepal, carving a meticulous strategy to balance both, without letting them overpower the state itself, will be a challenge for Kathmandu. In this regard, a clear implementation strategy specifying Nepal's role as well as the degree of ownership over the project must be carried out before any forward-movement on this course.

Where mutual trust and co-operation have to be the foundation for sustainable water relations, this area appears particularly strained in case of Indo-Nepal relations. India views Nepal with much suspicion vis-à-vis its relations with China and the Pakistan, and the widespread anti-India sentiment in Nepal has been a major spoiler in the bilateral. Nepal's internal instability, widespread corruption and lack of coherent views regarding hydro-power ventures cannot be overlooked.

Additionally, corruption levels in Nepal Electricity Authority is on the higher end. 

The exaggerated comparisons of Nepal’s water resources with the gulf countries’ oil reserves and terming Nepal as the power hub of Asia has projected a misleading image and vision, driven by lofty ideals instead of reality-based analyses. The assessment of risks associated with the 2014 PTA appear crucial. The Indian market will be the single largest end-buyer and consumer of electricity produced on export-oriented foreign investment. In this backdrop, Nepal needs to carefully examine the risks and gains associated with these ambitious goals, given its limited market access and lack of capability to invest. Additionally, asymmetric power relations with India that limit its negotiating capacity also needs assessment, or this can add to the pre-existing ambiguous relationship between the two countries.